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State and Local Income Tax Exempt for U.S. Investors
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| The FHLBank System was established in 1932 after the Great Depression. Its purpose then was the same as it is today - to foster homeownership, community development and increase the housing stock through wholesale lending to member financial institutions. As an added benefit for individual investors purchasing these debt securities, Congress made interest on all FHLBank bonds and discount notes exempt from state and local income tax.
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| In the 76 years since inception, the FHLBanks have been active in the capital markets, raising trillions of dollars for housing through the continuous sale of debt securities to investors here and abroad. During this same time, the FHLBanks have disbursed interest and principal to millions of investors. This exceptionally long history of uninterrupted, timely payment is just one reason why FHLBank securities carry the highest credit ratings (Aaa/P-1 and AAA/A-1+) from both Moody's and Standard & Poor's. Adding the tax exemption for individual U.S. investors makes these bonds and discount notes even more desirable.
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| In the spaces below, you can use the built-in calculator to estimate your effective yield for any given FHLBank bond or discount note. This makes it possible to compare FHLBank securities with other triple-A issues that do not have the valuable state and local tax exemption on interest. Enter the bond coupon (or yield to maturity, for a discount note) in the first box marked "Coupon." Then, enter the marginal income tax rate in your state of residence (the sum of the state and local tax rates). Both the coupon and the marginal rate should be entered as whole numbers. For example, "5.125%" should be entered as "5.125". Then run the calculator to obtain the result. You will find that a 5.125% FHLBank coupon is equivalent to a non-tax exempt yield exceeding 5.6%, using a 9% tax rate.
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| For additional information on the taxability of FHLBank debt securities, please see pages 16 - 18 of the Offering Circular. This document is available as a pdf file on the main page of the Office of Finance web site. Also, please consult with your tax advisor for additional information. |
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